Paycom (PAYC)

HR software provider Paycom (NYSE:PAYC) met Wall Streets revenue expectations in Q3 CY2025, with sales up 9.2% year on year to $493.3 million. The company’s outlook for the full year was close to analysts’ estimates with revenue guided to $2.05 billion at the midpoint. Its non-GAAP profit of $1.94 per share was 1.1% below analysts’ consensus estimates.

Company Overview

Pioneering the concept of employees doing their own payroll with its "Beti" technology, Paycom (NYSE:PAYC) provides cloud-based human capital management software that helps businesses manage the entire employment lifecycle from recruitment to retirement.

Modern HR software has two powerful benefits: cost savings and ease of use. For cost savings, businesses large and small much prefer the flexibility of cloud-based, web-browser-delivered software paid for on a subscription basis rather than the hassle and complexity of purchasing and managing on-premise enterprise software. On the usability side, the consumerization of business software creates seamless experiences whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy-to-use platform.

Paycom competes with established payroll and HR solution providers like ADP, Paychex, UKG (Ultimate Kronos Group), Workday, and Ceridian Dayforce, as well as newer entrants like Paylocity, Paycor, and Rippling.

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Thankfully, Paycom’s 19.7% annualized revenue growth over the last five years was decent. Its growth was slightly above the average software company and shows its offerings resonate with customers.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Paycom’s recent performance shows its demand has slowed as its annualized revenue growth of 10.8% over the last two years was below its five-year trend.

This quarter, Paycom grew its revenue by 9.2% year on year, and its $493.3 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 9.6% over the next 12 months, similar to its two-year rate. This projection is underwhelming and suggests its products and services will see some demand headwinds.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Paycom’s billings came in at $494.7 million in Q3, and over the last four quarters, its growth was underwhelming as it averaged 9.5% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in acquiring/retaining customers.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Paycom is extremely efficient at acquiring new customers, and its CAC payback period checked in at 13.4 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like Paycom, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Paycom’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 85.7% gross margin over the last year. Said differently, roughly $85.73 was left to spend on selling, marketing, and R&D for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Paycom has seen gross margins decline by 1.3 percentage points over the last 2 year, which is poor compared to software peers.

Paycom produced a 82.7% gross profit margin in Q3, down 1.6 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Paycom has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 27.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Paycom’s operating margin decreased by 4.6 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Paycom generated an operating margin profit margin of 22.8%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Paycom has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 30% over the last year, quite impressive for a software business.

Paycom’s free cash flow clocked in at $285.2 million in Q3, equivalent to a 57.8% margin. This result was good as its margin was 48 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Paycom’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 30% for the last 12 months will decrease to 20%.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Paycom is a profitable, well-capitalized company with $375 million of cash and $84.5 million of debt on its balance sheet. This $290.5 million net cash position is 2.8% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Revenue was in line and EPS missed. The company reaffirmed full-year revenue guidance, but this wasn't enough. The market seemed to be hoping for more, and the stock traded down 9.2% to $166.84 immediately following the results.

Updated: December 3, 2025 at 9:20 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Paycom.

Paycom isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its declining operating margin shows it’s becoming less efficient at building and selling its software.

Paycom’s price-to-sales ratio based on the next 12 months is 4.2x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $209.94 on the company (compared to the current share price of $164.40).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.